As we peer around the corner to 2019, there is a great deal of economic, political and market uncertainty. However, one thing we can say with reasonable certainty is that the current trend of integrating Environmental, Social and Governance (“ESG”) factors into investment strategy decisions is set to continue. In finalising goals and objectives for the year ahead, what could investors be considering on the subject of responsible investing?
Over the last 40 years sustainability has become a relevant topic in almost every sector and industry. With many businesses taking the view that sustainability will be a key driver of long-term value. A number of trends have led to this shift in behaviour, some of which are:
- Improvements in our knowledge around environmental and social issues, and their impact.
- Globalisation and connectivity driven by social media, making it easier to visualise the impact of unsustainable practices.
- Demographics, as people are living longer they are taking a longer-term view on their own personal impact.
Regulators have also taken a keen interest. For example, the European High Level Expert Group Final Report on Sustainable Finance was published in January 2018 and their recommendations are beginning to pass into regulation through the European Commission.
What can you do?
In light of this we are encouraging investors to ask themselves three key questions as we head into 2019.
What is my strategy?
Our experience with long-term investors is that their attitude towards responsible investing falls into one of the four descriptions below. By determining where you sit on this spectrum a clear set of principles can be created for how your investment strategy should be designed and monitored.
How does this impact my investment strategy?
The appropriate investment strategy will depend on your philosophy and principles (above). This will vary from exclusion of certain investments, to consideration of ESG factors in the investment process (as an alpha source or as a risk factor), to impact investments. The product landscape is evolving rapidly and creating interesting opportunities for investors in each of these categories. Most notable is the innovations for “seek alpha” investors. Over the course of 2018, a number of our clients have actively allocated to this space through our strategic and asset manager research into sustainable equity and renewable infrastructure.
How will I monitor it?
As with any investment strategy decision – if you can’t measure it, how do you know if it is working? This requires a reliable data source and a contextualised reporting framework. We have seen rapid improvement in the availability of data as well as the technology to make use of this data – and these improvements are set to continue. In 2011, just under 20% of S&P 500 companies reported on their sustainability, CSR, ESG performance related topics, by 2017 the total rose to 85%. This benefits our clients as we are able to provide transparency and clarity for decision-making on these matters. And as the data builds up and we have a longer track record, this will only improve.